July 2006

Some folks in Washington and elsewhere throughout the nation worry that we are nearing the end of the road for highway finance. The gas tax, they say, is dying.

The writing is on the wall, they say. Fuel prices remain high in comparison to recent experience, meaning that drivers will buy less fuel. Political instability shows no sign of abating in many places where petroleum is produced, meaning that supplies could be disrupted any minute. Some, like Princeton geologist Kenneth Deffeyes, argue that the pipeline is running dry, that world oil production capacity has peaked or soon will, that supplies will inexorably decrease.

Even if supplies remain abundant, people fearing global warming and other adverse consequences of our reliance on petroleum will continue pressing automakers and drivers to adopt more fuel-efficient vehicles and thereby reduce fuel consumption. Growing traffic gridlock in many cities might finally encourage rush-hour travelers to use transit or, with the aid of ever-cheaper high-speed communications, simply to stay home and telecommute. Other new technology—hydrogen-powered fuel cells, all-electric drives—could eliminate gasoline entirely, replacing it with less-easily-taxed alternatives.

In short, they say, sales of gasoline and diesel fuels are headed down. If sales fall, tax revenues are likely to follow. The tax rate, in most places, has been held at fixed levels for a long time. This includes the federal component, raised to its current 18.3 cents per gallon level in 1993. During the intervening years inflation has eroded the dollar's purchasing power. Suggestions that the tax should be raised tend to evoke a "Read my lips...." response from legislators and voters.

If the gas tax dies, many will mourn its passing, at least in Washington. Taxes on gasoline and other fuel account for about 87 percent of federal highway spending, according to Federal Highway Administration (FHWA) statistics. A feeling of crisis has spread as the policy mavens contemplate widening of what they see as an already enormous funding shortfall. For example, a study recently completed for the National Chamber Foundation, a public policy think tank affiliated with the U.S. Chamber of Commerce, estimates that between now and 2015 annual Highway Trust Fund revenues will fall well short of the amount needed just to maintain the nation's highway system, without thinking about making improvements. The Fund could run a deficit as soon as Fiscal Year 2008. The government's own projections show that deficit at $2.3 billion by Fiscal Year 2009. The pundits seem to agree that Highway Account of the Trust Fund will achieve a zero cash balance soon after the current funding legislation expires at the end of 2009, what some might call the moral equivalent of bankruptcy.

But what does all this mean for local public works managers? Does the future of the gas tax really matter? If so, what can responsible local officials do to prepare for whatever changes might be coming?

How important is the gas tax?Our reliance on gas-tax revenues to fund transportation investment is relatively new, of course. In the nation's early years local governments typically took responsibility for roads, requiring eligible males to do roadwork a few days of each year or pay a fine or fee. That system is still used to build and maintain roads in many developing regions of the world.

Here, general taxes gradually replaced in-kind service as the source of resources, but local governments continued to build and maintain most roads. Well into the 1930s, local rural governments and municipalities paid a greater share of total spending for highways than did the states or the national government.

That situation began to change with the coming of the internal combustion engine and the associated growth of demand for petroleum. Oregon in 1919 led the way as the first state to impose a tax on gasoline. In less than a decade after, all the states and Washington, D.C., had followed along. In 2003, state taxes ranged widely from Georgia's 7.5 cents per gallon to Wisconsin's 31.1 cents per gallon.

The federal government joined in with the Revenue Act of 1932, adding a one-cent-per-gallon charge on top of the state taxes, but it was not until the Federal-Aid Highway Act of 1956 was passed that the federal role became really substantial. That law gave multi-year longevity to the tax, expanded the federal-aid highway program, authorized creation of the Highway Trust Fund, and specified that 100 percent of the federal gas tax receipts be deposited in the fund.

It was a brilliant move for the roads proponents. These taxes generated the funds for construction of the nation's interstate and regional arterial highway systems, and there is no question these systems have brought benefits. There is no question also that the centralized gas tax has given the federal government a strong voice in how roads are built and managed, even though it is the states and localities that do the real work of management.

The impact of centralization carries over to the states, where FHWA statistics show that fuel taxes in aggregate account for about 67 percent of highway spending. At local levels, however, excluding transfers from the Feds and states, gas taxes provide a meager six percent of revenue for roads. The balance comes from local property taxes, general-fund appropriations, and the like. Include the intergovernmental transfers and gas taxes still provide only about one-quarter of what local governments take in for road spending.

Will the gas tax disappear?The gas tax will then be missed in many state capitals as well as in Washington, but from a local perspective the death would be less than catastrophic. In any case, the situation seems a lot like what Mark Twain said upon seeing his own obituary in the newspaper: The reports of its demise are greatly exaggerated.

Another Washington report, by a prestigious Transportation Research Board (TRB) committee, concludes that the fuel tax will remain a viable funding source for at least another decade, in the sense that current arrangements "will retain the capacity to fund transportation programs at an inflation-adjusted rate comparable with that of the past 20 years." Noting that the average user fees per vehicle mile and the fraction of highway spending covered by user fees nationally have remained fairly constant for more than two decades, the report concludes that even with a reduction of 20 percent in average gallons of fuel consumed per vehicle mile—plausible, in the committee's view—offsetting the revenue effect would not require extraordinarily large fuel tax increases. The report does, however, question the willingness of legislatures to make even modest increases in tax rates.

What are the alternatives?So the post-gas-tax era is not here yet, and may be some time coming. Nevertheless, a lot of people at federal and state levels are looking for other sources of funding, and they tend to prefer the term "user fees" when discussing the topic. The TRB committee, for example, concludes that despite the gas tax's continuing viability, "transportation system users and the public could benefit greatly from transition" to a different way of raising revenue, and recommends a fee structure that charges for the actual use of the roads.

Charging tolls for road use is one obvious way of doing this. Organizations such as AASHTO and the American Public Transportation Association (APTA) have expressed support for expanded use of tolling. However, tolls as they are conventionally applied will not work everywhere, and even the most enthusiastic boosters are hard pressed to suggest how tolling could generate more than 10 percent to 15 percent of the total revenue likely to be needed to keep the road system going.

In selected situations, however, tolls are apparently not only feasible but also a good business. The City of Chicago attracted international attention in late 2004 by signing a deal giving a joint venture of an Australian Bank and Spanish toll-road operator a 99-year lease on the Chicago Skyway, an eight-mile road linking the Dan Ryan Expressway to the Indiana Tollway. This effective sale of the Skyway to Macquarie Infrastructure Group and Cintra Concesiones de Infraestructuras de Transporte put $1.83 billion into the city's coffers. Critics of this particular deal have noted that the money is likely to be used for general purposes, unrelated to the transportation system that is generating the cash.

Another suggestion has been that state officials should look carefully at property taxes and other "value capture" mechanisms as ways to raise money for transportation. "Value capture" means recovering through taxes or fees some of the real-estate price increases that typically are observed when road or transit improvements increase the market appeal of nearby locations. Ron Kirby, executive director of the Metropolitan Washington Council of Governments and a speaker at the TRB's 2005 Annual Meeting, reported that private developers had recently offered to pick up about one-third of the costs of building a new downtown subway station. Such offers can move a project quickly to the head of the line for public approval, Kirby noted.

Some communities have had success treating local access as a utility service and charging a fee for the service within a defined utility district. This approach bears at least a familial similarity to "area charging" or licensing schemes of the sort used in Singapore and, most recently, London. These schemes, also similar to the time-of-day and congestion-based tolls being charged on some toll roads, impose a fee for autos to enter a defined area at particular times of day. Advances in electronics and telecommunication technology, embodied in "intelligent transportation systems" (ITS) applications, are making such schemes increasingly feasible, both technically and financially, and they are under active consideration in several other cities.

Political feasibility seems to be improving as well. Despite dire predictions of the public's response to his introduction of the Central London Congestion Charging scheme early in 2003, Mayor Ken Livingstone handily won reelection and has seen the scheme extended to a larger area within the city. Some U.S. cities are now studying the idea.

Having failed to get voters to accept gas-tax increases despite evidence of serious problems of road and bridge deterioration, Oregon is again leading the way in exploring other revenue sources, this time using ITS to enable a vehicle-miles tax. The idea is to use global positioning satellite (GPS) tracking devices in vehicles to monitor mileage driven on the state's highways. At the instigation of the state's legislature and Department of Transportation, two Oregon State University professors and several students devised the system. An on-board computer tallies miles driven. The driver pulls in to fuel up at a pump equipped with a radio device that reads the amount of miles the car has traveled in certain zones since its last fueling. For instance, there is no charge for miles traveled outside the state. The pump computes the VMT tax and adds it to the gas purchase. An initial test involving 20 drivers ended in October 2005 and the agency is now beginning a more extensive one-year trial. Washington State has undertaken a similar effort in the Seattle area.

Where does all this put local officials?The future of such schemes, especially their political viability, is cloudy. At least one commentator (Tom Greenwood, writing in The Detroit News, November 30, 2004) termed Oregon's VMT tax idea "dumb, complicated and scary," for example, and rumor has it that a recent nominee for appointed office in California failed to gain legislative confirmation because of her association with the concept.

The gas-tax clouds that federal and state officials see on the horizon could nevertheless have a silver lining for local-government road managers. One reason is that the gas tax is less important to local government as a source of transportation funds. If the gas tax eventually dies and is not replaced by another source of funds—a very unlikely scenario, I would judge—the impact will be less dramatic in the local-road system.

Another reason is that the search for alternative funding sources could give local governments a stronger hand in setting funding priorities. A number of the more interesting suggestions for how to replace the gas tax—property taxes, utility fees, sales taxes—involve mechanisms that local governments know well. While state or federal use of these mechanisms might complicate life for local officials, given taxpayers' inclination to view all taxes as the same, regardless of who imposes it, local government's demonstrated capability and experience in assessing and collecting such taxes are good reasons for why these tasks should be kept under local control. Having such control arguably will give local officials more direct influence on the whole funding system, in the same way that bankers influence borrowers.

Finally, taxpayers are much more willing to fund specific projects in areas they know, rather than programs designed to raise revenue generally. Many local governments already manage all aspects of state highways within their jurisdictions, but still depend on priorities set at the state level for the funding of major maintenance and upgrading. Local government may be able to do a better job of raising funds sooner by appealing directly to the interests of their citizens.

In addition, area charging schemes and utility districts are likely to remain easier to implement than other more exotic ITS-based revenue-collection methods, at least in the near term until technologies are perfected. Communities that put such systems in place now will be ahead of the game, well prepared for the changes likely to come when the next federal reauthorization discussion begins in earnest.

The death of the gas tax, if it comes, could indeed be the end of the road for our old ways of doing business in transportation funding. But clearly there is time to prepare and a lot of discussion ahead. Certainly local government officials will want to participate in those discussions; they could end up in the driver's seat.

Dr. Andrew Lemer is a former member of APWA's Government Affairs Committee and Leadership & Management Committee, and a current member of the Transportation Committee. He can be reached at (202) 334-3972 or alemer@nas.edu.